What Is a Bond?

Learn about bonds in this Howcast finance video with expert Gregory McGraime.

Transcript

A bond is basically an I.O.U. I'm loaning you money, you are paying me interest, and at the end of the deal, I get my money back. That's what a bond really is. And you can get a bond from the federal government, like a savings bond or a treasury bond. You can get a bond from a big corporation, that's called a corporate bond. And you can even get a bond from a state like New York or a city like Los Angeles. Those are called municipal bonds. But the reason that someone invests in bonds is bonds tend to be more conservative than the stock market; they tend to be a little more predictable; and yet a bond is typically going to pay more money than a cash investment. So the reason to invest in bonds is to diversify your money. If I have all of my money in the stock market and the stock market goes down, then I'm in trouble. But by having some money in bonds, I can balance out my investment portfolio and make sure I'm not taking too much risk. A general rule-of-thumb for you watching out there is that when you are looking at your entire investment portfolio, take your age, and that's the percentage of money that should be invested in bonds. So for example, if I'm 40 years old, 40% of my account would be invested in bonds. I want you to take a look at your investment portfolio and ask yourself that question "How much of my portfolio is in bonds?" And particularly during turbulent times with a lot of volatility in the market, having some portion of your money invested conservatively in a way that is not impacted by the stock market can really make a lot of sense.